What China Property Crash? Economists See Growth Bump

Cranes operate at a residential construction development near Canton Tower, right, in the Haizhu district of Guangzhou. New construction has fallen 22 percent and sales have slumped 7.8 percent this year, testing the government’s four-year commitment to curbs targeted at making homes more affordable and its reluctance to enact broader economic stimulus. Photographer: Brent Lewin/Bloomberg

May 23 (Bloomberg) -- China’s biggest homebuilding slump in
at least four years isn’t enough to dissuade a majority of
economists from predicting real estate will still contribute to
2014 growth. Property controls will be eased, they said in a
Bloomberg News survey.

While 12 of 18 economists say China has some national
oversupply of housing, only seven say the market is in a bubble
state countrywide, according to the survey conducted from May 15
to May 20. Half see bubbles in some cities, and a majority says
the loosening of restrictions on home purchases and loans will
be limited to a regional level.

New construction has fallen 22 percent and sales have
slumped 7.8 percent this year, testing the government’s four-year commitment to curbs targeted at making homes more
affordable and its reluctance to enact broader economic
stimulus. The slowdown’s depth will have implications for
everything from demand for Australian iron ore to land sales
that help local governments repay their $3 trillion of debt.

“China won’t fully lose the engine, but the engine will
roar less than in the past and will be a more moderate supporter
for growth,” said Louis Kuijs, Royal Bank of Scotland Group
Plc’s chief Greater China economist in Hong Kong, who formerly
worked at the World Bank.

Central bank Governor Zhou Xiaochuan said China may have
housing bubbles in some cities, an issue that’s difficult to
resolve with a single nationwide policy. The economy “can still
manage something around a 7.5 percent growth rate,” Zhou said
in an interview in Rwanda yesterday, referring to the nation’s
expansion target for 2014.

Property Stocks

Chinese real-estate companies gained today on speculation
the government will ease property curbs. An index of developers
listed in Shanghai rose 2.1 percent at the close, the biggest
advance since April 22. Poly Real Estate Group Co. surged 4.3
percent.

A manufacturing gauge released yesterday signaled the
economy is stabilizing after the government announced tax breaks
and faster railway spending to support growth. The preliminary
purchasing managers’ index for May from HSBC Holdings Plc and
Markit Economics unexpectedly rose to a five-month high of 49.7,
approaching the expansion-contraction dividing line of 50.

UBS AG has estimated the real-estate industry accounts for
more than a quarter of final demand in the economy when
including property-generated needs for goods including electric
machinery and instruments, chemicals and metals.

‘Doom Mongers’

Five of 17 respondents said the property market will make a
net contribution to growth this year of 1 to 2 percentage
points, while four said it would add less than 1 point and one
analyst projected more than 2 points. Four people said there
would be a drag of 1 to 2 points and two projected a subtraction
of less than 1 point.

Next year, 10 economists see a net contribution to growth,
while five expect a drag.

The nation’s housing market won’t crash like that of the
U.S., Japan and Hong Kong, the official Xinhua News Agency said
in an article published May 21 that called people forecasting
such an outcome “doom mongers.” China will have strong housing
demand because of continuing urbanization, speculative buying is
less prevalent than it was in Hong Kong and mortgage debt as a
proportion of GDP is lower than it was in the U.S., Xinhua said.

“China’s urbanization process is far from being over,”
said Xu Gao, chief economist with Everbright Securities Co. in
Beijing, who formerly worked for the World Bank. “The housing
market is not seeing any structural turning point but rather
suffering from a cyclical downturn, and the market can be
brought back to life when policies become appropriate.”

New Buildings

That the property market is undergoing a slowdown is of
little dispute. Floor space of new residential buildings under
construction fell 23.8 percent last month from a year earlier,
the steepest drop in figures going back to April 2010, according
to data compiled by Bloomberg. April home prices rose in the
fewest cities in 1 1/2 years, government statistics showed on
May 18.

While a majority of respondents said China has an
oversupply of housing, three said the current national supply is
in balance with demand, even if some cities are facing issues,
while two said the current supply is too small to meet demand.

Not everyone is optimistic. Moody’s Investors Service this
week revised its credit outlook for Chinese developers to
negative from stable. Ren Zeping, a researcher at the State
Council’s Development Research Center, said economic growth may
slow to about 5 percent in two to three years, the state-run
Shanghai Securities News reported yesterday.

‘Biggest’ Risk

“Real-estate investment is the biggest macro risk,” said
Zhu Haibin, chief China economist at JPMorgan Chase & Co. in
Hong Kong, who sees an investment slump, including the effects
on related industries, dragging growth down about 0.5 percentage
point in 2014. “The government should do something to contain
the downside risk. It’s probably time to remove the home
purchase restrictions policy in most cities.”

At the same time, the probability is low that the
government will ease curbs at the national level, Zhu said.

The world’s second-largest economy grew 7.4 percent in the
first quarter from a year earlier, slowing from a 7.7 percent
pace in the previous period, according to government figures.
The median projection of economists for full-year growth of 7.3
percent would mark the weakest pace since 1990.

There are signs that the government is taking action to
limit the real estate slump. The central bank this month called
on the biggest lenders to accelerate the granting of home
mortgages, while Southern Weekly reported yesterday that the
housing ministry has allowed most cities to adjust home-buying
curbs as they see fit.

“The government will be quite keen to avoid a very large
downturn,” RBS’s Kuijs said. While real estate amplifies
downward pressures on the economy, “it doesn’t have to be the
end of the world,” he said.